A Taxing Business

A Taxing Business

Partners Joe Cox and James Nici have built a

boutique law firm in Naples specializing in estate planning.

Business is brisk thanks to Congress' twisted laws.

None of Joe Cox' wealthy clients plans to die in 2010.

That's the year the estate tax will disappear. But like a bad sequel, it's scheduled to come back in 2011 at the old 55% tax rate for estates over $1 million.

That's led to all sorts of macabre jokes about choosing to die in 2010. But even if you died in 2010, your heirs may not get the windfall they expected (and would have less reason to pull your life-support plug). That's because heirs would not get a "step up" in basis to the full market value on the date of your death if you died in 2010. Instead, they would use your basis and would have to pay higher capital gains taxes on the sale of any assets you leave to them.

"Actuarially, you're going to live past 2010," Cox tells his clients. And then he adds: "The tax will not be repealed. The Democrats won't consider it."

All of this virtually guarantees estate-planning attorneys such as Cox and his partner, Jim Nici, will continue to do brisk business in Naples, where there's no shortage of wealthy people who need their advice. Their roster of clients has climbed to about 4,500 since they established their firm in 2000.

As it stands now, the estate-tax law is so complex, and changes so often, that repeat visits to your estate-planning attorney are virtually guaranteed. "If we had lobbied Congress to perpetuate our existence we couldn't have thought of this," Cox chuckles. There is no shortage of estate-planning strategies, from setting up elaborate trusts to family partnerships.

Although estate planning is principally designed to decide how you want your assets to be distributed after you die, "most of my clients are driven by the tax savings," Cox says. He cautions: "We try not to let the tax tail wag the dog."

When it comes to the estate tax, Cox advises planning for the worst. There may be legislative action on the estate tax next year, but don't count on repeal. He says his best guess is that Congress will establish a 45% tax on estates valued at more than $3 million. "We'll be lucky if they keep it at 45%," he warns.

Heirs will probably continue to receive a step-up in basis to the value to the date of death as they have before, though Cox doesn't plan either way. "I don't plan documents for basis issues," he says.

There may be no resolution of the estate tax issues anyway, especially in light of the financial turmoil. "This is a low priority," Cox says. That's because estate taxes represent a tiny percentage of the government's revenues.

However, the downturn in the financial markets has prompted heirs to question their trustees about how well their assets are protected. One trustee recently told Cox he'd spread $500,000 in cash among five different banks to take advantage of the $100,000-per-account protection by the Federal Deposit Insurance Corp.

In fact, the Florida Trust Code has loosened the restrictions this year to make it easier for beneficiaries to change trustees if they're unhappy with the way they're managing assets.

"We've been pushing for that for years," says Cox, who always inserts language in trusts to give beneficiaries the right to change corporate trustees. If the markets continue to go down, expect more beneficiaries to take action.

-Jean Gruss